The loss leader: selling cheap today to be paid back tomorrow

A one-dollar camera

In February 1900 Kodak put a camera on sale for $1. It was called the Brownie, and it was conceived and marketed for one reason: to sell Kodak roll film.

A camera is bought once. Film is bought every time someone takes a picture. So the cheap camera was not the product. It was the way into a house, and the film was what paid. The Brownie sold more than 150,000 units in its first year.

George Eastman had seen it years before. Film would return more profit than cameras, so he set out to control the film market, and that model changed little for several decades. By 1976 Kodak controlled 90% of film sales and 85% of camera sales in the United States.

Then the film went away. By 2001 Kodak's digital cameras were losing approximately $60 per unit sold, and in January 2012 Kodak filed for Chapter 11. The cheap camera had worked for most of a century. What ended it was not a rival camera. It was the disappearance of the thing that paid for the camera.

That is the whole decision in one story. The cheap part is easy and almost always works: people like a bargain. The hard part is the payback, and this guide is about the payback.

What loss leader is

The something else has many names: film, refills, ebooks, interest on the cash a customer leaves in an account, a bigger contract next year. Every loss leader is a small loan to the customer. The company pays now, and expects to be paid back later, by the same customer, through a different door.

So the real decision is never just the price. It is three questions at once: what pays you back, how sure you are that it will, and whether you are the one who collects it.

Why it is so hard

Cutting a price is the easiest move in business. Three things make this version of it hard.

The ways companies did it

The decisions on record take four shapes. Each one sells something cheap and expects to be paid back somewhere else, except the last, which turns the discount down.

What 13 companies did

Here is every decision on record, placed by the year it was made and marked by how it turned out. Hover a mark, or open the table, for the company and the outcome.

Of the 12 decisions that can be judged, 10 were never undone, 0 were walked back and 2 were kept only in part.

Read "never undone" carefully here. Polaroid's film model was never undone. It ran until the film stopped selling, and then the company went bankrupt. A loss leader can hold for decades and still end badly, because what ends it is the payback, not the price.

The decisions kept only in part share one thing: the payback depended on something the company did not control. Microsoft bought search volume for Bing by paying Yahoo 88% of the search revenue on Yahoo's sites, and in April 2015 the deal went non-exclusive. Amazon sold Echo speakers below cost and waited for a habit of shopping by voice that never formed. (The Echo decision is also recorded under The Money Machine, where it is judged walked back.)

Amazon's two devices make the point from both sides. With the Kindle it sold the device at about cost and owned the store the books came from, and the move held. With the Echo it sold below cost and waited for customers to start shopping by voice, and they did not.

How to run this decision

If you are weighing a version of this choice, here is what the record suggests doing, in order.

1. Name the payback in one line before you set the price

   Film. Interest on idle cash. Ebooks. A bigger contract. If the honest answer is lifetime value, or that you will work out how to make money later, there is no payback yet, and what you are planning is a long promotion.

   Seen in: Kodak, 1900 · Robinhood, 2015
2. Make sure you collect the payback, not a partner

   Amazon owned the store its Kindle readers bought from. Microsoft's search volume came through Yahoo's sites on a revenue share. The Kindle payback held. The Yahoo terms were rewritten in 2015, when Yahoo's chief executive was reported to want more autonomy from the deal.

   Seen in: Microsoft and Yahoo, 2009 · Amazon Kindle, 2007
3. Test the payback before you fund the discount

   Find a small group of customers who got the cheap product and check that they actually buy the thing that pays. Amazon put a microphone in kitchens on the assumption that people would shop by voice, and the assumption was never tested first.

   Seen in: Amazon Echo, 2014
4. Ask what could kill the refill, not what could kill the product

   List the ways the thing that pays you back could stop selling on its own, even while the cheap product is still in use. Then check whether any of them is already happening in a nearby market. Film did not lose to a better camera.

   Seen in: Polaroid, 1972 · Kodak, 1900
5. Report the payback next to the discount, with one owner

   The cost of the discount is on a report every month. The payback rarely is, so the wrong number gets managed. Put both on the same page: how many customers you bought, and how much they have paid back so far.

   Seen in: Epic Games Store, 2018
6. If the payback is not money, say what it is and cap the price

   Sometimes the point of the loss is a position or a rival's weakness. That can be a good trade, as long as it is written down at the start as a trade, with a limit on what you are willing to pay for it.

   Seen in: Salesforce and Merrill Lynch, 2007 · Charles Schwab, 2019

Warning signs

What it has looked like when this decision was going wrong.

• The payback is described as lifetime value rather than as a thing customers buy.Amazon Echo, 2014
• The volume you are buying sits inside a partner's business.Microsoft and Yahoo, 2009
• Users are growing and the money they spend is not.Epic Games Store, 2018
• The thing that pays you back is being replaced in a nearby market.Polaroid, 1972

All 13 cases

Each case is one company at one decision: what was on the table, what it chose, why, and what followed, with every fact sourced.

Questions

What is a loss leader strategy?

Selling a product cheap, at cost or below it, on purpose, so that the customers it attracts buy something else that makes money. Kodak's one-dollar Brownie camera, sold to sell film, is an early example.

What is the difference between a loss leader and razor-and-blades?

Razor-and-blades is one kind of loss leader: a cheap device paid back by a consumable it needs, such as cameras and film. A loss leader can also be paid back in other ways, for example by interest on the cash customers leave in a free trading account.

What are examples of loss leaders?

Kodak's Brownie camera and Polaroid's SX-70 (paid back in film), Amazon's Echo speakers (sold below cost to drive voice shopping), Robinhood's and Schwab's free trades, and the free games in the Epic Games Store.

Why do loss leaders fail?

Rarely because of the discount. They fail when the payback never comes, when it disappears while the product is still in use, or when a partner collects it instead of the company that paid for the discount.